Mandatory Annual Report Descriptions of Business Model and Strategy, Investor Uncertainty, and Disclosure Cascade Effects

Abstract

Policymakers view commentary on business model and strategy (BMS) as a central pillar of effective corporate reporting. We examine the impact of mandatory annual report BMS disclosure on two aspects of firms’ information environment: investor uncertainty and provision of (voluntary) BMS-related content in timelier communication channels. We use for identification the UK Corporate Governance Code 2010 de facto BMS reporting mandate for a subset of London Stock Exchange firms. We confirm that BMS disclosure increased in response to the mandate. In response, we predict and find a material treatment period decline in investor uncertainty, together with increases in investor presentations and BMS-related disclosure in earnings press releases. A structural model reveals that earnings releases and investor presentations mediate the link from annual report BMS disclosures to lower investor uncertainty.

Keywords: Strategy, Annual Report Narratives, Textual Analysis, Information Asymmetry

JEL Classification: M41, M21, D89